TAXPAYER BURDEN:THE COST of the nationalisation of Anglo Irish Bank to the taxpayer will depend on what bankers call the quality of its loan book.
According to its latest set of results, released on December 3rd last, the bank had loans worth €73.2 billion out to customers as of the end of September 2008. The Irish national debt at the end of December 2008 was €50.4 billion. The State had €19.2 billion in the pensions reserve fund and the social insurance fund, so the net figure was €31.2 billion.
If 1 per cent of Anglo’s loans turned out to be bad debts, the cost would be €732 million. If 5 per cent turned out bad, the figure would be €3.6 billion.
Most of the bank’s loans are to major property developers whose assets have plummeted in value in recent times. Many of their more recent projects are no longer commercially feasible.
The question is how many developers will default on their loans, and how much money can be recovered by the bank from those who do?
According to the bank’s December 3rd statement, loans to particular projects tend to be secured against related companies not involved in the project, as well as personal guarantees from the persons who own the companies involved.
This means that if the bank finds that the assets associated with a development are no longer worth enough to cover the money it is seeking to recoup, it can seek to recover the money from other businesses or assets on which it also has guarantees. And if that’s not enough, it can seek to recover money from the personal wealth held by the developer or developers who were behind the project.
Therefore, before the taxpayer is hit for any bad debts incurred by the bank, the people behind these loans should have to hand over the vast bulk of their assets to the bank.
The second big category of loans on the bank’s book are loans to Seán Quinn and his Quinn group of companies. Quinn, owner of the Quinn insurance, property and quarrying group, is believed to have lost something in the region of €1 billion last year through a disastrous involvement in so-called “contracts for difference” deals in Anglo shares, something that must have considerably weakened it as a business.
The ability of the Quinn group to service and repay the loans from Anglo Irish Bank will be a major factor in deciding the extent of the cost to the taxpayer of the Government’s move on Thursday.
The bank’s loans were spread around projects in Ireland, the UK and the US. The difference between Anglo’s assets and liabilities as of the end of September last was €4.1 billion. This money constitutes a buffer that lies between the bank’s bad debts and the taxpayer. In December the bank decided to set aside €500 million against bad debts not yet recognised, and that forms another, thinner buffer between bad debts and the taxpayer.
